IOSR Journal of Economics and Finance (IOSR-JEF) e-ISSN: 2321-5933, p-ISSN: 2321-5925.Volume 6, Issue 5. Ver. I (Sep. - Oct. 2015), PP 10-20 www.iosrjournals.org DOI: 10.9790/5933-06511020 www.iosrjournals.org 10 | Page Tax Incentives and Foreign Direct Investment in Nigeria 1 George T. Peters, 2 Bariyima D. Kiabel, MBA; MRes; ACA,Ph.D; FCTI; CPA; MNIM 1,2 Department of AccountancyFaculty of Management Sciences,Rivers State University of Science and Technology,Port Harcourt, Nigeria. Abstract: Given the significance of Foreign Direct Investment (FDI) to economic growth and the use of tax incentives as a strategy among government of various countries to attract FDI, this study examines the influence of tax incentives in the decision of an investor to locate FDI in Nigeria. Data were drawn from annual statistical bulletin of the Central Bank of Nigeria and the World Bank World Development Indicators Database. The work employs a model of multiple regressions using static Error Correction Modelling (ECM) to determine the time series properties of tax incentives captured by annual tax revenue as a percentage of Gross Domestic Product (GDP)and FDI. The result showed that FDI response to tax incentives is negatively significant, that is, increase in tax incentives does not bring about a corresponding increase in FDI. Based on the findings, the paper recommends, amongst others, that dependence on tax incentives should be reduced and more attention be put on other incentives strategies such as stable economic reforms and stable political climate. Keywords: Foreign Direct Investment, Tax Incentives, Nigeria, Economic Growth. I. Introduction Empirical and theoretical evidence over decades suggest that FDI is an important source of capital for investment. It can contribute to Gross Domestic Product (GDP), gross fixed capital formation (total investment in a host economy) and balance of payments (BOPs) especially when there is good economic conditions in the host economy such as the level of domestic investment/savings, the mode of entry (merger and acquisitions of new investments) and the sector involved as well as the host country’s ability to regulate foreign investment (Toward Earths Summit, 2002). FDI can complement domestic development effort of host economies by: (a) increasing financial resources and development; (b) boosting export competitiveness; (c) generating employment opportunities and strengthening the skill base; (d) protecting the environment and social responsibility; and (e) enhancing technological capabilities via four basic channels which are the internalization of research and development, migration of skilled labour, linkages with suppliers or purchasers in the host economies and horizontal linkages with competing or complementary companies in the same industry (Raian 2004 ; OECD 2002). On the causal relationship between FDI and growth for three countries - Chile, Malaysia and Thailand – Chaudhury&Mavrotas (2003) found a bi-directional causality running from FDI to GDP (a proxy for growth) and vice versa. However, the thesis that FDI determines growth was not established in the case of Chile where a unidirectional relationship was found running from GDP to FDI instead. In support of the above findings, Alfaro (2003) revisited the impact of FDI on economic growth by examining the role FDI inflows play in promoting growth in primary, manufacturing and service sectors of 47 countries between 1980 and 1999 and found that FDI flows into different sectors of the economy and exert different effects on economic growth. FDI into the primary sector was found to have a negative effect on growth while that of the manufacturing sector impacted positively on growth. With regard to less developed countries, macro and micro empirical analysis suggest that overall FDI have positive impact on economic growth. In many countries FDI constitute the core of the economy’s growth. In Bolivia, for instance, Flexner (2000) found that FDI plays a crucial role for a number of reasons: it positively impacts growth by increasing total investment and improving productivity through diffusion of advanced technology and managerial skills. A study across developing countries for the period 1990-2000 by (Makola, 2003) showed that FDI was a significant determinant of economic growth across the 12 - case studied economies and was estimated to be three to six times more efficient than domestic investment. This, according to (Makola, 2003), is the capacity of FDI to produce a crowding-in effect. Based on the foregoing, the crucial question then is whether tax incentives is a significant driver of FDI. Is it possible to stimulate FDI activity significantly using tax incentives or does it have only a minimal impact on FDI? Or is it possible that the FDI was driven by other political and economic factors besides tax incentives beyond fiscal control? There is a need therefore, to re-appraise the effectiveness of tax incentives generally in the promotion of inflow of FDI. As pointed out by Arogundade (2005), factors such as security, currency convertibility, political stability and market or source of supplies are known to weigh higher on an investor’s scale of preferences than fiscal incentives. As he further agued, there is no consensus yet on the role